Investors should consider the valuation of growth shares prior to a purchase

Investors should consider the valuation of growth shares prior to a purchase

Investors should consider the valuation of growth shares prior to a purchase, according to experts at Haslers Chartered Accountants

Corporate finance specialists are encouraging investors to consider the valuation of growth shares and conduct accurate forecasts to gain a greater appreciation of their future tax bill.

Growth shares are unlisted and typically used as a management incentive where there is already significant value in the equity of a business, for example where there is no leverage, leverage is limited, or where shares are issued after the value has increased.

The starting point for most valuations of unlisted shares is the price that they would typically fetch on the open market.

When it comes to deciphering tax related to shares, in general, there are a variety of factors that need to be considered, as not all commercially relevant information should necessarily be considered.

For example, it may not be appropriate to take forecasts into account when valuing uninfluential minority holdings, but HM Revenue & Customs have indicated that this may not be the case for growth shared.

In its guidance, it says forecasting of growth shares are important as ‘the growth prospects are intrinsic to the investment and no sale would proceed without access to additional information such as company forecasts’.

This was recently reiterated by HMRC, along with several other interesting comments on valuing growth shares:

Michael Watts, Corporate Finance Partner, said: “Growth shares value is defined commercially in terms of meeting or exceeding defined targets or thresholds for profit or equity proceeds, and, therefore, by the prospects for growth.

“An investor is not likely to purchase such shares without understanding at least something about their forecasted value in future.

“It is therefore understandable that HMRC treats these shares in much the same way when taxing them, as has been proven by the First Tier Tribunal.”

Michael said that businesses and their employees that hold shares should consider past valuations of growth shares in the context of an HMRC challenge, or diligence on an existing share scheme.

He also said that carrying out new valuations could be useful when (minimising the risk of a future HMRC challenge.

“It is important that holders of growth shares continually monitor their value and consider the potential tax implications. A wide variety of commercial and legal factors go into these shares which are constantly changing and evolving, which leave them more open to challenge by HMRC during a sale or purchase,” Michael added.

For more information about the tax implications of growth shares and other investment issues, please contact Michael by emailing michael.watts@haslers.com or calling 020 8418 3350.

Investors should consider the valuation of growth shares prior to a purchase

Investors should consider the valuation of growth shares prior to a purchase
Investors should consider the valuation of growth shares prior to a purchase